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Abu Dhabi, UAETuesday 19 June 2018

A people's choice guide to the economics nobel

Which economists should be rewarded for their contributions to people's daily lives?

Richard Thaler, author of best-selling book 'Nudge', is one of the fathers of the field of behavioural economics. Ralf-Finn Hestoft / Corbis
Richard Thaler, author of best-selling book 'Nudge', is one of the fathers of the field of behavioural economics. Ralf-Finn Hestoft / Corbis

Because economics is such a diverse field, with many distinguished thinkers, predicting the winner of the Nobel Prize in economics is notoriously difficult. But suppose that we narrowed the field, so as to focus on candidates who have not only made important theoretical contributions, but have also had a significant impact on the world, and affected the lives of numerous people?

If that is the standard, here are some leading contenders for the prize, which is to be announced today:

Esther Duflo, Massachusetts Institute of Technology. Governments are keenly interested in the actual effects of their interventions, but they often lack tools to establish what works and what doesn’t. Building on work in medicine and related fields, Duflo has pioneered the use of randomized controlled trials. One group of people serve as a control; another group, otherwise identical, is subjected to a policy intervention, designed to reduce disease, increase access to loans, reduce poverty or improve education. If the trials are done properly, they can be used isolate the actual effects of the intervention. That’s huge progress.

In recent work, Duflo argues that an economist can be a plumber: “She installs the machine in the real world, carefully watches what happens, and then tinkers as needed.” Focusing on poverty and development, Duflo’s own randomized controlled trials are not only providing invaluable information to policy makers; they are also getting help to many people who need it.

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Richard Posner, University of Chicago. Recently retired from the federal bench, Posner is the leading thinker behind the field of law and economics, which tries to analyse legal rules with the help of economic tools.

Suppose that a local government imposes a rent control law, or that a state court strikes down certain contracts as “unconscionable” because they are unfair to poor people. What are the likely effects? Whether the issue involves occupational safety, automobile accidents, antitrust law, consumer protection or the role of private property, public officials, lawyers and judges are now using the methods that Posner helped introduce. (If Posner gets the Nobel, a strong co-recipient would be Judge Guido Calabresi, who also did pioneering work.)

William Nordhaus, Yale University. The problem of climate change raises unusually difficult problems for economists, not least because of high levels of uncertainty about the likely effects, tough questions about how to turn those effects into monetary equivalents, and serious challenges, at the intersection of economics and philosophy, about how to deal with harm to future generations. More than anyone else, Nordhaus has produced disciplined, rigorous and luminously clear thinking about all of these questions, in a way that is transparent about underlying assumptions and that makes real progress on, and possibly even solves, some seemingly intractable problems.

Nordhaus’s work played a defining role in the efforts of the U.S. to produce a “social cost of carbon,” which in turn influenced many regulatory initiatives both here and abroad. (If Nordhaus gets the Nobel, a strong co-recipient would be Harvard’s Martin Weitzman, who has done pioneering work on how to think about risks of catastrophe, with special reference to climate change.)

W. Kip Viscusi, Vanderbilt University. Viscusi is rarely listed among Nobel candidates, but his work on the monetary valuation of risks to life and health has had a massive effect. In the U.S. alone, it plays a major role in the work of the Environmental Protection Agency, the Department of Transportation, the Department of Energy, the Department of Labor and the Department of Health and Human Services.

These agencies and many others build on Viscusi’s work on the “value of a statistical life.” Viscusi does not really ask what a life is worth; he is interested in the value of statistical risks. If, for example, workers face a mortality risk of 1 in 100,000, how much compensation do they get in return? Suppose that the best answer is in the vicinity of $90. With a little multiplication, that produces a $9 million value for a statistical life -- roughly Viscusi’s own figure, which is, not coincidentally, the value now used by most agencies of the U.S. government.

Richard H. Thaler, University of Chicago. Over recent decades, the rise of behavioural economics has been the most interesting development in economic theory. More than anyone else, Thaler has been responsible for that development.

He has shown that in concrete ways, people do not act as predicted by standard economic theory. Far from seeing money as fungible, people put their cash in separate “mental accounts” (mortgage money, vacation money, retirement money). Investors overreact to unexpected news events. Human beings care about fairness -- and they are willing to pay something to punish people who have been unfair. People are planners as well as doers, and when they are planning, they might try to foil their own doing (as, for example, by keeping high-calorie foods out of the house).

It’s true that with respect to Thaler, I’m biased. He’s a friend as well as a co-author. But no one can doubt that his influence can be seen in the work of governments all over the world, as officials use his findings to increase retirement savings, cut poverty, boost employment, increase safety on the highways and improve health. (Thaler is the pioneer, but worthy co-recipients would be Colin Camerer of the California Institute of Technology, Ernst Fehr of the University of Zurich, George Loewenstein of Carnegie Mellon University and Matthew Rabin of Harvard.)

Economics is called “the dismal science,” and since the Great Recession, the field has taken a beating in the public eye. Sure, some of the research of those listed here has produced dismal news -- but it has also helped make the world a much better place.

Cass R. Sunstein is a Bloomberg View columnist. He is the author of “#Republic: Divided Democracy in the Age of Social Media” and a co-author of “Nudge: Improving Decisions About Health, Wealth and Happiness.”